Computation Section
Investment Economics
 -Show Cash Flow

It is often interesting to see the explicit cash flow generated by a project. Different kinds of analysis are also possible with the cash flow displayed. To construct a cash flow, choose the Show Cash Flow item from the menu. The dialog shown below accepts the parameters of the display.

The add-in produces a display on the Excel worksheet whose upper-left corner is located at the cell specified Cell box of the dialog. The address in this box is the location of the cursor when the dialog is called, but it may be changed. The display covers a number of cells below and to the right on the worksheet, so care must be given that data is not overwritten. The program issues a warning before overwriting worksheet information.


cash flow dia


Three different types of cash flows are possible: project, comparison and blank. When the project option is selected, the names of all the projects defined in the workbook are listed. Use the cursor to click on the desired project.

Comparisons can also generate cash flows as described later. The Blank option produces an empty form that can be filled by the student. Clicking OK with E6 selected constructs the worksheet display shown below.


The lower part of the display shows the cash flow for E6 in each year, generated from the component data in the project description. The net cash flow is shown with black numbers indicating positive cash flows and red numbers in parentheses indicating negative cash flows. Although these numbers are computed from the project definition, they can be changed to observe the effects of variations.

The cumulative column (Cum. Val.) is the accumulation of the cash flow values and is computed with formulas. The net investment column is also computed with formulas.


The top of the display shows computed values and data associated with the cash flow. Cells colored yellow hold formulas. Uncolored cells can be changed. Only the MARR and the guess for the IRR can be changed by the student.

Reading from the top we see the following computed values

This is based on the project generating the cash flow and should not be changed.
The second row of the display holds a function that identifies the type of cash flow with respect to the cumulative cash flow. The example is a Simple Investment characterized by money first going out and then coming in. The cash flow column has a single sign change. A series of negative values (in this case only one) is followed by a one or more of positive values. Other possibilities are Simple Loan, where there is a single sign change from positive to negative values, and Mixed Cash Flow, where the cash flow changes sign more than once.
This is the number of periods before the first 0 crossing for the cumulative cash flow. For a simple investment, it is the number of periods required for the total revenues to equal the total investment. When the value 0 is not obtained for a whole number of periods, a fractional number of periods is computed by linear interpolation.
Minimum Period
Some projects may start at negative times to indicate advance preparation relative to some arbitrary reference point (time 0). If the project has the first cash flow at some time other than 0, this number will appear here.
This is the net present worth of the cash flow at time 0. It is computed with the Excel PW function.
IRR Guess
This cell provides a starting point for the IRR function that has been placed in the cell immediately below. This is useful for mixed cash flows that may have multiple IRR values.
This is the internal rate of return of the cash flow. It is computed with the IRR Excel function.
(Not shown for this example)
This is the Return on Invested Capital. For simple investments or loans it is the same as the IRR. For mixed cash flows with more than one solution for the IRR, the RIC has the advantage of being unique. The RIC computation finds the interest rate that makes the future value at the time of the last cash flow equal to zero. When the RIC column is negative, the value of the cash flow grows in the next period according to the RIC rate. When it is positive it grows according to the MARR. See the IRR/RIC page for a more extensive discussion. Some cash flows do not have a valid RIC.

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Operations Management / Industrial Engineering
by Paul A. Jensen
Copyright 2004 - All rights reserved

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